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Contract Types
Contract Types
Contract types are generally grouped into two broad categories: fixed price contracts and
cost reimbursement contracts.
1. Fixed Price Contracts:
a. A price that is not subject to any adjustments.
b. Places upon the contractor maximum risk and full responsibility for all
costs and resulting profit.
c. It provides maximum incentive for the contractor to control costs and
perform effectively.
d. Firm Fixed Price contracts are the preferred method of contracting from
the governments perspective. Used when sealed bid is involved. Used for
acquiring supplies and services and/or for acquiring commercial items.
2. Variations of fixed price contracts:
a. Economic price adjustment: revision of prices for specific contingencies.
i. Adjustments based upon increases or decreases from an agreed
upon level in either published or established market prices for
specific items.
ii. Adjustments based upon actual increases or decreases in the price
of specific items of cost or specific labor that the contractor incurs.
iii. Adjustments based upon increases or decreases in the specific
labor or material cost standards or indexes, such as Bureau of
Labor Standards indices.
b. Incentive Contracts: An FPI contract specifies a target cost, a target profit,
a price ceiling and a profit adjustment formula. The FPI contract provides
a profit motive for the contractor to perform efficiently from a cost
perspective. If the contractor completes the contract while incurring less
cost that originally anticipated, the contractor will receive more profit.
i. Used when a fixed-firm contract is not appropriate
ii. Supplies/services can be acquired at lowers costs, with improved
delivery or improved technical performance.
3. Cost Reimbursement Contracts
a. Provides for payment of allowable incurred costs, to the extent prescribed
in the contract. Establishes an estimate of total costs for the purpose of
obligating funds and establishes a ceiling that the contractor may not
exceed, except as his own risk.
b. Cost reimbursement contracts place the least cost and performance risk on
the contractor.
c. Cost-reimbursement contracts are suitable for use only when uncertainties
involved in contract performance do not permit costs to be estimated with
sufficient accuracy to use and type of fixed price contract.
d. Used for research and development contracts. Prohibited for the
acquisition of commercial items.